Trade wars – or short-term posturing?

This article was first published in The New Zealand Farmers Weekly, June 15, 2009.

The United States’ decision to follow the European Union in imposing dairy export subsidies has raised concerns here of a costly trade war between the US and the EU, with New Zealand caught in the middle.

The new subsidy allocations have been applied under the US Dairy Export Incentive Program and cover: (a) skimmed milk powder (68.201 tonnes); (b) buttermilk (21.097 tonnes); (c) various cheeses (3.030 tonnes); and (d) certain other miscellaneous products.

They are mostly retrospective, applying from July 2008 to the end of this month and will allow any qualifying US exporter to specified countries, including key markets in Asia, Latin America and Africa, to seek a “bonus payment” which has the effect of subsidising the export prices received.

Although NZ would argue that the payments are against the spirit of the WTO, they are specifically allowed under the WTO Agreement on Agriculture which, from its inception, has been recognised as a fudge.

Articles 3, 9 and 10 provide that:

Members may impose agricultural export subsidies specified in Article 9 to the extent permitted in the Member’s Schedule of Commitments annexed to the Agriculture Agreement

The maximum permitted extent of such subsidies (both in terms of expenditure and quantity of subsidised product) must be decreased each year, resulting in a total reduction of 36% of expenditure and 21% of quantity of subsidised product, as compared to the member’s initial commitments, and

Members must not circumvent their export subsidy commitments by using forms of export subsidies, or non-commercial transactions, not listed in Article 9.

The US has taken up the full quantities specified in its Schedule of Commitments.

In theory, there are avenues of recourse open to New Zealand, although they are not likely to be invoked.

There is the right to take a WTO complaint if the US subsidies cause “serious prejudice” to New Zealand’s dairy export industry, for instance by displacing New Zealand’s exports in a third country market (SCM Agreement, Articles 5 and 6.3(b)).

There is also under the GATT (Article VI) and the SCM Agreement (Part V) provision to seek countervailing duties; but these are typically imposed only where the subsidised product affects the domestic market of the injured state.

The bigger question is the effect on the world trading system.

There are three key concerns:

That, in the short term, the subsidies may further depress world prices, harming non-subsidised dairy exporters, such as New Zealand and Australian farmers

That the US response to the similar, but less extreme, EU measure in January 2009 may trigger a further retaliation from the EU, with the risk of starting a trade war, and

Perhaps most importantly, that the EU and US decisions may signal a lack of willingness to come to terms in the ongoing Doha agriculture negotiations.

The US move is unlikely in itself to artificially depress world dairy prices, given the small absolute quantities involved.

However, we may well see a flurry this month of export-based activity supported by the new subsidies, so some price effect is possible.

More importantly, the EU may respond to the US action by raising its own subsidy levels further, which it can lawfully do to the extent of 243,300 tonnes of skimmed milk powder, 366,100 tonnes of butter and butter oil and 305,100 tonnes of cheese.

This is the risk of a dairy trade war which, if begun in earnest, could lead to other countries reinstating export subsidies for those products and, potentially, for other agricultural exports.

This risk is real, but should not be overstated.

The EU and the US have very recently reached an initial agreement in their 20-year dispute over access of US beef to Europe caused by the EU’s objection to growth-promoting hormones.

And, in general terms, both the EU and the US have sent warnings, consistent with the conclusions of the G-20 summit, that increased protectionism would be detrimental to the world economy.

The real problem is the old chestnut: The need to reform the ineffective WTO agriculture rules through the Doha round.

Recent drafts from the WTO Agriculture Committee indicate progress is being made slowly but surely.

The present plan is for developed country members to eliminate all remaining agricultural export subsidy entitlements by the end of 2013, with a 50% reduction in permitted expenditure by the end of 2010.

NZ must hope this ambitious target is still achievable and that the recent moves by the EU and the US indicate short-term posturing, rather than a longer-term change of strategy.

Daniel Kalderimis is a principal in Chapman Tripp’s dispute resolution department, specialising in issues of international trade, investment and arbitration.

He compiles a monthly bulletin, Connected Asia Pacific, which is available here.